ESci131n

Engineering Economy
Assignment 2
Coverage: Break-even Analysis
Deadline: 8am, Friday, 23 April 2021

Class Number 12
Class Schedule MWF 3-4 PM

Solve the following problems. Present a complete and comprehensive solution following
the traditional format (given, required and solution) using the required units.
Solutions/final answers not using the correct units will not earn points. Truncated or
“short-cut” solutions will not be accepted. For the break-even point, if the answer
contains a decimal value, round it off to the next higher whole number. For the other
required items (profit, loss, etc.), round off your final answer to two (2) decimal places.
Enclose your final answer with a rectangle otherwise it will not be credited.
1. An automotive company produces transmission gears for several farm tractor manufacturers.
The base cost of operation is P596,700 per year. The cost of manufacturing is P18.40/gear. If the
company sells the gears at an average price of P37.90 each, how many gears must be sold each
year for the company to break even? (3pts)
ANSWER:
𝐺𝑖𝑣𝑒𝑛:
𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 = 𝑃 37.90/𝑔𝑒𝑎𝑟
𝐹𝐶 = 𝑃 596,700/𝑦𝑒𝑎𝑟
𝑣𝑐 = 𝑃 18.40/𝑔𝑒𝑎𝑟
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑:
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠 𝑒𝑎𝑐ℎ 𝑦𝑒𝑎𝑟
𝑆𝑜𝑙𝑢𝑡𝑖𝑜𝑛:
𝐿𝑒𝑡: 𝑋′ = 𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠
𝑆𝑖𝑛𝑐𝑒 𝑤𝑒 𝑎𝑟𝑒 𝑙𝑜𝑜𝑘𝑖𝑛𝑔 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑏𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡,
𝑤𝑒 𝑐𝑎𝑛 𝑢𝑠𝑒 𝑟𝑖𝑔ℎ𝑡 𝑎𝑤𝑎𝑦 𝑡ℎ𝑒 𝑓𝑜𝑙𝑙𝑜𝑤𝑖𝑛𝑔 𝑓𝑜𝑟𝑚𝑢𝑙𝑎:
𝐹𝐶
𝑋′ = (𝑠𝑝−𝑣𝑐)
𝑃 596,700/𝑦𝑒𝑎𝑟
𝑇ℎ𝑢𝑠: 𝑋′ = (𝑃 37.90/𝑔𝑒𝑎𝑟−𝑃 18.40/𝑔𝑒𝑎𝑟)
𝑋′ = 30,600 𝑔𝑒𝑎𝑟/𝑦𝑒𝑎𝑟
∴ 𝑇ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑚𝑢𝑠𝑡 𝑠𝑜𝑙𝑑 30,600 𝑔𝑒𝑎𝑟/𝑦𝑒𝑎𝑟 𝑡𝑜 𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛.
2. The fixed cost at Harley Motors Incorporated is P1 million annually. Their main product is sold
at P8.50/unit with a variable cost of P4.25/unit. Determine the (a) break even quantity/year and (b)
annual profit if 200,000 units are sold in a year. (3pts)

ANSWER:
𝐺𝑖𝑣𝑒𝑛:
𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 = 𝑃 8.50/𝑢𝑛𝑖𝑡
𝐹𝐶 = 𝑃 1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛/𝑦𝑒𝑎𝑟
𝑣𝑐 = 𝑃 4.25/𝑢𝑛𝑖𝑡
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑:
𝑎. 𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦/𝑦𝑒𝑎𝑟
𝑏. 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡𝑡 𝑖𝑓 200,000 𝑢𝑛𝑖𝑡𝑠 𝑎𝑟𝑒 𝑠𝑜𝑙𝑑 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝑆𝑜𝑙𝑢𝑡𝑖𝑜𝑛:
𝐿𝑒𝑡: 𝑃 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
𝑋′ = 𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠
𝑎.
𝑆𝑖𝑛𝑐𝑒 𝑎𝑡 𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛:
𝑇𝑆 = 𝑇𝐶
= 𝐹𝐶 + 𝑉𝐶
𝑇𝑆 = 𝐹𝐶 + 𝑣𝑐 (𝑋′)
𝑇ℎ𝑒𝑛:
𝑃 8.50/𝑢𝑛𝑖𝑡(𝑋′) = 𝑃 1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛/𝑦𝑒𝑎𝑟 + 𝑃 4.25/𝑢𝑛𝑖𝑡 × 𝑋′
8.50(𝑋′) = 1 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 + 4.25 𝑋′
(𝑋′) = 1 𝑚𝑖𝑙𝑙𝑖𝑜𝑛/4.25
𝑋′ = 235,294.1176
𝑋′ = 235,295 𝑢𝑛𝑖𝑡/𝑦𝑒𝑎𝑟
𝑏.
𝐴𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 𝑖𝑓 200,000 𝑢𝑛𝑖𝑡 𝑎𝑟𝑒 𝑠𝑜𝑙𝑑 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝑃 = 𝑇𝑆 − 𝑇𝐶
= 𝑇𝑆 − (𝐹𝐶 + 𝑉𝐶)
= 𝑃 8.50/𝑢𝑛𝑖𝑡(200,000) − [𝑃 1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛/𝑦𝑒𝑎𝑟 + 𝑃 4.25/
𝑢𝑛𝑖𝑡(200,000)]
= 𝑃 1,700,000 − (𝑃 1𝑚𝑖𝑙𝑙𝑖𝑜𝑛 + 𝑃 850,000)
= 𝑃 1,700,000 − 𝑃 1,850,000
P = − 𝑃 150, 000/𝑦𝑒𝑎𝑟
∴ 𝑇ℎ𝑒𝑟𝑒 𝑖𝑠 𝑎 𝑙𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑃 150,000 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟.